Foreign grip on London property is easing on a cocktail of risks

LONDON’S real estate market is gearing up for a pivotal 2023, following years of turbulence which slowed the torrent of foreign money that once flowed to the capital.

Cross-border investment flows to properties in London totalled £12.4 billion (S$20 billion) in 2022, showed data compiled by MSCI. That is a big drop-off from the £30.5 billion of foreign deal-making in 2015, which preceded the twin blows of Brexit and the Covid-19 pandemic.

London, which has long attracted huge swathes of foreign investment and drew in the most capital inflows of any global city in the first half of the year, faces uncertainty over property valuations as interest rates rise and in the wake of political chaos triggered by September’s mini-budget. Foreign deal-makers accounted for 57 per cent of London real estate investment in 2022, compared with 65 per cent in 2015, MSCI data showed.

“Market liquidity is currently severely affected by a wide spread between buyer and seller pricing caused by the uncertainty of how the rise in interest rates will crunch property values,” said Sue Munden, a senior analyst at Bloomberg Intelligence.

“Transaction volumes may be weak until inflation has been controlled and interest rates settle.”

Britain’s 2016 Brexit vote briefly diverted a chunk of investment to Paris, before attention switched back to London in 2021. That mini-boom was quickly derailed by Russia’s invasion of Ukraine earlier this year, said Munden.

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Still, London’s appeal as a destination for global investors and a weaker pound should keep overseas investment afloat in 2023, she said.

“While this plays out, the percentage of international buyers may stay above the 50 per cent mark, especially given the weak pound,” Munden said.

“The long-term confidence in London as a global city continues to make it a preferred investment market internationally.”

China’s once-firm grip on the London property market is loosening more than most nations, as tight capital controls and a cooling of relations with the UK stemmed the flow of money coming from the Asian nation.

China accounted for less than 1.5 per cent of all cross-border investment in London properties in 2022, or about £185 million, MSCI data showed.

That is a stark drop from the nation’s 11 per cent share in 2013, which totalled around £2.2 billion, when Chinese investors were pouring cash into the capital city as then-Prime Minister David Cameron and then-Mayor Boris Johnson courted their investment.

Changing sentiment towards China may also be deterring investment.

The Chinese government’s plan to build a new embassy near the Tower of London was rejected this month. Tower Hamlets Council unanimously refused to grant planning permission, citing concerns about residents’ safety, including that the area will become a target for terrorists and a hotspot for surveillance.

In a sign showing how negative relations have become, UK Prime Minister Rishi Sunak used his first major foreign policy speech this year to warn that the so-called “golden era” of UK-China relations was over.

While Sunak backed away from prior government plans to label the country a “threat” to Britain, the tone is in stark contrast to the approach of Cameron’s government, whose efforts to boost relations between the countries included a UK visit in 2015 where Chinese President Xi Jinping joined him for a pint of beer.

Still, Chinese policies at home have had the greatest impact. It is no coincidence that deal-making dropped dramatically after Xi introduced tighter capital controls in 2016.

“The drop in investment is almost entirely driven by capital controls in China,” said Rasheed Hassan, head of global cross-border investment at broker Savills. “That’s absolutely the dominating reason for the change in volumes.”

In 2022, more than a quarter of the £12.4 billion of cross-border real estate flows to London came from American investors, who capitalised on a strong US dollar.

American buyers made up 14.5 per cent of all overseas prime London residential property purchases in the first half of 2022, showed data compiled by Knight Frank. That is up from 6.2 per cent in the previous six months and the greatest proportion in data going back to the start of 2018.

London real estate broker Charles McDowell said five of the six properties he sold between July and November were to American buyers, with prices ranging from £25 million to almost £50 million.

“This year we have seen the emergence of a market dominated to a large extent by dollar-denominated buyers, as well more Middle East and Far East buyers, particularly in Hong Kong,” McDowell said.

“We expect this to continue into 2023.” BLOOMBERG